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2016 Presidential Election: Predicting Markets, Election Results

behavioral finance economics

Many clients are concerned about how the upcoming election results might impact their portfolios.  Markets, over the long-term, are mostly moved by fundamentals, economic outlook, and, for the time being, central bank policies. We continue to assert that our clients’ investment decisions are best met by assessing and respecting longer term goals, and avoiding current events. In the spirit of the imminent election and its aftermath, we’ll explore a few thoughts regarding predicting markets and election results.

Before getting to the meat of this, we offer a modest and trivial digression to a disturbing bit of news scrawled across the cable news programs recently. Apparently, only one in five Millennials have ever had a Big Mac. Digesting this, in context of elections, suggests that a future U.S. President will not know about two all-beef patties, special sauce, etc. on a sesame seed bun. Political pundits believe this election, and the consequences for years to come, will be determined by voter turnout. Yet, only one of five millennials voted in the last midterm elections. Whether Big Mac consumption was causal or correlated to the voting turnout is yet unknown.

Change, by its nature, brings uncertainty.  Generally speaking, the market prefers political stability. It is fair to say that one Presidential candidate is seen as an agent for change, and the other not.  According to Ned Davis Research (for years 1900-2012) on average, financial market gyrations (volatility?) tends to tick up in the weeks preceding elections, and more so in years when the incumbent party is expected to lose.  Post-election, the markets tend to rally by year end with either party in the White House. However, on average the markets do much better when the incumbent party wins.  

Sure, it would be tremendously helpful to find predictive indicators   -- a predictive result would be “because this exists, something will be more likely to happen.” Consider the Super Bowl effect, which measures the likelihood of a positive year in the markets, based upon the team that wins the Super Bowl. There is an 82% association of positive market returns for years when certain NFL teams win the Super Bowl.  Of course, there is no relation between football and markets, and this correlation is merely an association and not causal

But, back to the political parties.  Each party claims to be better for business and investments. Can the investor class find investing comfort with one party in the White Houser versus the other?  The answer is a resounding “not really.” 

Each election cycle, charts are rolled out suggesting which presidential party is better for stock markets, and the benefits of dividing power between the White House and Congress. There are not sufficient data points for these charts to be statistically valid and they are not predictive of how the markets will perform with either party at the top.  Frankly, even if political party were scientifically predictive, would the science hold up with this year’s unpredictable outliers especially with the historical high unfavorable ratings for both candidates?

Looking down the road, the voting power of Millennials will likely introduce additional variability, as they are soon to be the largest generation of eligible voters, long held by the baby boomers who may recall the McDonalds ad slogan from the 1970s and 1980s and "deserve a break today.”

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